IT is time to look at the institutional aspect of regulation which has become the bane of private industry, and an impediment to growth. Getting the government to be an enabler rather than a disabler is the real challenge.
Since the 1970s the failure of the economic system can be traced to a deficiency of governance at one level or another, the most crucial of which was the desire of the state machinery to regulate most activities. It carried out this task by creating visible and invisible roadblocks. Small enterprises, in view of their size and limited managerial resources, suffer more than larger enterprises from cumbersome rules and regulations, their uncertain application and arbitrary amendments with little, if any, redress.
There is an urgent need to reduce the footprint of the state by dismantling the overextended regulatory framework and apparatus strangulating private activity and shackling the economy’s growth prospects.
A large part of the regulatory framework exists because of the lack of clarity on the role of government. In several instances, new products and instruments have become available that are more effective mechanisms for achieving the objectives underlying the existing laws or administrative arrangements for their enforcement.
For instance, the government has building and electricity inspectors to ensure the safety and security of private buildings used for public purposes. These services are not required if such buildings are comprehensively covered by insurance companies.
Through this instrument the owners of such buildings can be spared the frequent visits of these government functionaries, who would be denied the opportunity for extorting bribes. The security and safety of the public using these buildings would also be assured, since the private insurance companies would ensure proper construction and maintenance.
At times the regulations actually block private efforts to improve productivity, efficiency and sustainability of operations. For instance, the sugar industry needs restructuring to be viable, involving consolidation, mergers and closures of a large number of inefficient sugar mills with small capacities.
Unfortunately, the policies of provincial governments are irrational and inimical for this overdue shakeout in the industry. They prohibit the relocation and consolidation of mills required to achieve the economies of scale and maintain competitiveness, resulting in the reduction of the efficiency and productivity of investments.
The theological principle to regulate economic activity based on complete distrust of the market and a belief in the state’s omnipotence has restricted the space for private-sector operations. The role of markets is underestimated in the belief that the state is much more knowledgeable and objective and that markets are often rigged and imperfect and private behaviour shortsighted.
Even civil society in Pakistan is suspicious of markets and provides the bureaucracy with an excuse to regulate. The bureaucracy opts for direct controls rather than market-friendly fiscal rewards and punishments not only because of powers to extort money that this approach gives them but also because they prefer certainty of command and understand little about subtlety of induced behaviour.
Flawed conceptions drive us to mimic big countries in constructing complicated state apparatus. Unfortunately, donors also provide us uniform advice, persuading us to set up the same institutions as in developed countries.
Resultantly, regulators get established even before markets begin to function, in some cases with a regulator for each market, at times two regulating the same market — for example the State Bank and the Securities and Exchange Commission of Pakistan are simultaneously regulating financial institutions, and in the case of modarabas there is the third regulator, the religious/Sharia board.
In several instances (e.g. Nepra, Ogra, PTA, Pemra etc) regulatory bodies have been created more to park retiring well-connected civil servants who clearly do not possess the skill set required to perform the job to which appointed
The official concept of a typical regulator is the head of the agency, two to three assistants (called ‘members’ — again mostly retired bureaucrats), PAs and peons, office space and several cars and cellphones! How the government views their utility is evident from its insistence that their decisions be implemented only after review and notification by government!
Owing partly to the nature and history of Pakistan’s economic development, where even the middle class was not the product of a dynamic growth process but was created through public-sector employment, we seemingly cannot visualise economic growth without support and patronage. Thus, civil society continues to view the state as an all-powerful paternal entity that is supposed to protect us against all risks and also provide for all occasions. Not surprising then that government continues to be large and unaccountable and rules rather than serves.
Every good organisation makes periodical attempts to clean up its own house. All procedures and practices are subject to a fresh review. However, our governments hardly ever question their own mechanisms and practices, except to protect their interests and those of the civil servants. Many agencies in the public sector are moribund with little or no accountability for the quality of their output, even for the delivery of services. Hence, there is a need to redefine their role and the way they carry out their business, which would involve a major reduction in the areas of their activity.
The demands of a globalised economy require the private sector to adopt internationally recognised technologies and management practices to remain competitive globally.
However, the government, which is supposed to facilitate the private sector, and also expects it to become modern in its outlook, sees nothing wrong with its own skills and work processes being antiquated. This huge contradiction is unsustainable requiring adjustments in the size and skill base of the bureaucracy, 45 per cent of which is hardly educated!
The writer is former governor of the State Bank of Pakistan.